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iGATE Corporation (NASDAQ:IGTE)

Q2 2013 Earnings Call

July 17, 2013 8:00 am ET

Executives

Salil Ravindran

Sunil Wadhwani - Co-Founder and Co-Chairman

Gerhard Watzinger - Interim Chief Executive Officer and Interim President

Sujit Sircar - Chief Financial Officer and Executive Vice President

Analysts

Mayank Tandon - Needham & Company, LLC, Research Division

Richard Eskelsen - Wells Fargo Securities, LLC, Research Division

Amit Singh - Jefferies & Company, Inc., Research Division

Jeffrey Rossetti - Janney Montgomery Scott LLC, Research Division

Brian Kinstlinger - Sidoti & Company, LLC

Glenn Greene - Oppenheimer & Co. Inc., Research Division

Pinku Pappan - Nomura Securities Co. Ltd., Research Division

Ashwin Mehta - Nomura Securities Co. Ltd., Research Division

Vincent A. Colicchio - Noble Financial Group, Inc., Research Division

Operator

Greetings, and welcome to the iGATE Corporation's Second Quarter 2013 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Salil Ravindran, Head of Investor Relations for iGATE Corporation. Mr. Ravindran, you may begin.

Salil Ravindran

Okay. Thank you, Ralph. Good morning, and thank you, all, for joining our call to discuss the second quarter 2013 financial results. We hope you have all had a chance to review our earnings release and the fact sheet, which is up on our website. With me today on the call are Sunil Wadhwani, iGATE's co-Chairman; Gerhard Watzinger, iGATE's Chief Executive Officer; and Sujit Sircar, iGATE's Chief Financial Officer.

A copy of today's press release and supplemental financial information are posted on iGATE's Investor Relations website at igate.com. Today's call is being recorded, and a copy of the transcript will be available later today on our website.

The agenda for today is as follows. Gerhard will start providing you with an overview of our quarterly results in the context of our business strategy, with the perspective on the overall industry. This would be followed by a discussion on our financial performance in greater detail by Sujit. Finally, we'll open the floor for Q&A.

Before we begin, I would like to remind everyone that some of the statements made during today's discussion may be forward-looking in nature and may involve some risks and uncertainties. These risks and uncertainties may cause actual results to differ materially from those set forth in the statements. Additional information concerning these risks and uncertainties can be found in the company's recently issued press release, also available on our website, as well as our latest 10-K and 10-Q. IGATE Corporation assumes no responsibility to update any forward-looking statements.

On our call today we will refer to certain non-GAAP financial measures, which we believe provide additional information for investors and better reflect the management's view of operating performance. You can find a reconciliation of those measures to GAAP measures, as well as related information, in our earnings release, as mentioned, in the IR section of the website, igate.com. Please also refer to the investor factsheet for further details on our results.

I will now turn the call over to Sunil.

Sunil Wadhwani

Thanks, Salil. Good morning to everyone in the U.S., and good afternoon to those listening in the rest of the world. This was a strong quarter for iGATE, and we are very pleased with our results.

Before we dive into the details, I'd like to express thanks from our company's Board of Directors to Gerhard for returning to iGATE as our President and CEO. Given his familiarity with iGATE and his significant leadership experience, we have not missed a beat. Our teams are performing well, we were successful in closing several large deals and we continued to execute on our business strategy during this period.

Our CEO search is proceeding well, and we believe this is a very sought-after position, given iGATE's opportunities for growth, given our leadership in the business outcomes space, given our culture of innovation, our service excellence and our status as a leading employer. Our goal remains to have a new CEO on board in the fall, and we will update you when we have selected a candidate.

With that, I'd like to turn the call over to Gerhard to provide you with more details on our second quarter 2013 financial results. Gerhard?

Gerhard Watzinger

Thank you, Sunil. We delivered solid second quarter 2013 results. Revenue was $283 million, which is an increase of 6% year-over-year and 3% sequentially. Non-GAAP earnings per share were $0.44. We're particularly pleased with the sequential growth acceleration, which was stronger than we had expected even with a negative foreign exchange impact of slightly greater than $1 million. Growth was fairly broad-based across industries in the Americas, and we are seeing more positive signs related to overall offshore IT service spending.

In addition, our business is being driven by the trends we have discussed over the last several quarters, including that clients are spending their budgets in program ramps, overall, or in line with plans. Our strategic positioning in Business Outcomes is helping to drive larger programs, particularly transformational deals in process reengineering and legacy modernization, and we are also experiencing demand in areas across service lines, such as infrastructure management services, testing and process outsourcing.

We are also seeing very good traction in our iTOPS solutions around insurance, mortgage and capital markets. Since we spoke to you on our first quarter earnings call, we signed 3 very significant deals and many others in our sweet spot in the multimillion dollar range. The first large deal is with MetLife, a longstanding customer of ours. We announced a new 5-year contract valued at $109 million, extending both the scope and length of our engagement with this important customer. We participated in a competitive bidding process to assist MetLife in building out an innovative infrastructure model to manage its IT systems towards greater efficiency and flexibility in order to drive lower costs and increase business agility.

This agreement is further validation of our insurance domain expertise and our service delivery excellence. We were selected because of the quality and the creativity of the solution and innovative commercial structuring based on the industry-leading ITIL infrastructure support model. In addition, while not a Business Outcomes deal currently, this expertise was an important competitive differentiator throughout the sales process.

In addition, we signed another deal with a leading telecom company in Europe. This is a 5-year infrastructure management deal valued at about $100 million. We will remotely manage our client's infrastructure in various locations throughout the organization. We are also pleased to announce that we are moving ahead on schedule in the third quarter with a large deal we have been discussing with you. This 7-year deal, valued at about $200 million, involves the build out of a new capital markets trading platform. We will assume responsibility for the current legacy system, and we will provide trade reconciliation support while we develop and build a new streamlined and modern platform. The deal also enables us to implement our iTOPS model.

Overall, this was a good quarter for new customer wins, adding 11 new customers, including 2 new Fortune 1000 customers. We added 8 in North America and 3 in EMEA/APAC. 4 were in the manufacturing, retail distribution, logistics sectors; 3 were in Banking and Financial Services; 3 were in media, entertainment, leisure travel; and 1 was in public sector. We also continue to see expansion opportunities with our current client base and believe existing customers will be the key driver for the company.

We have spent a great deal of time reaching out to our 300-plus customers to answer any questions they might have regarding the CEO transition, and they remain firmly in support of their partnership with iGATE. In addition, through our ongoing CEO outreach and brand and marketing investments, we continue to create opportunities to discuss the benefits of our solutions, particularly Business Outcomes, while also ensuring that we understand our clients' current business and operation goals so we can identify expansion opportunities.

These efforts, coupled with the positive changes we have made in sales and account management, are improving our position. We have added new sales leadership at key levels throughout the organization and have brought on a significant number of new salespeople. We have also added more rigor to our sales and account management processes to better identify new opportunities and expand the value we provide. We believe we have completed the majority of the sales team transition, but we will continue to invest in our business development efforts as we look to capture the significant opportunity we see ahead of us.

We also continue to make investments in our domain expertise and solutions, particularly in Business Outcomes. We have identified insurance as a key area for us and are expanding on our TPA offerings. We also see capital markets and various mortgage processes as opportunities for Business Outcomes and are making incremental investments in these solutions. Overall, we are pleased with our progress this quarter and believe that the business environment, combined with our efforts, positions us well for ongoing growth.

I will provide you with more thoughts on our outlook for the remainder of the year at the end of our prepared remarks. But I'm now going to hand over the call to Sujit to provide you with more details related to our financial results.

Sujit Sircar

Thank you, Gerhard. Good morning and good afternoon to everyone. Thank you for joining us on this call. Our revenue for the quarter was $283.3 million compared to $274.9 million in the previous quarter and $268 million in the second quarter of 2012. On a sequential basis, growth was strong at 3%, including a loss of $1.3 million due to the strengthening of the U.S. dollar against various foreign currencies. Year-over-year revenue grew 5.7%. This quarter, our largest customer accounted for 12.8% of total revenue. Our top 5 customers contributed 40% of the total revenue, and they continue to be our growth drivers. Our top 10 customers contributed 49.8% to total revenue, and we ended the quarter with 315 active customers.

Gross profit margin was 37.9% compared to last quarter's reported gross margin of 38.1% and an improvement from 37.4% we reported in the second quarter of 2012. We are pleased with our gross profit this quarter, which was slightly better than our expectation. As you know, gross margins are typically lower sequentially in the second quarter due to our annual wage increase that takes place in April. This quarter, wage increases were partially offset by ForEx benefit, reduced immigration cost and a lower payroll tax. We continue to hold 40% as our gross margin target on a medium to long term.

SG&A for the quarter excluding D&A was $44.5 million compared to $42.3 million last quarter, which excludes delisting cost of $4.8 million and $0.5 million, respectively. The increase is attributable to planned expenses from our marketing campaigns and increase in the sales headcount and wage increases. In addition, legal and PR costs related to the recent extraordinary event contributed approximately $1.5 million expenses included in SG&A. These costs are expected to continue for the next few quarters. Overall, we expect a moderate increase in SG&A expense in the upcoming quarter as we continue to prioritize returning our revenue growth to industry levels by investing in our sales, marketing and solutions.

As part of the overarching initiative to consolidate the corporate structure of iGATE group companies, we completed the merger of our Indian subsidiaries we discussed with you last quarter. We have recognized a property transfer fee and stamp duty cost of $4.3 million. The final cost will be determined during the course of the year and is excluded from our non-GAAP calculations.

Depreciation and amortization expenses for the quarter were $8.6 million compared to the previous quarter of $9.3 million and were positively impacted by rupee depreciation. This quarter, we absorbed anticipated and scheduled annual depreciation charges. D&A should continue to bend near this figure for the next few quarters on an absolute dollar basis.'

For the quarter, GAAP EBITDA was $58.1 million or 20.5%, while non-GAAP EBITDA, which excludes stock-based compensation and mergers and reorganization expenses, was $66.2 million or 23.4%. This quarter saw a ForEx gain of $2 million compared to gain of $2.5 million in the previous quarter. Other income for the quarter was $17.4 million. This is largely attributable to booking of capital gains on our short-term mutual fund investment and certificate of deposit. Also included in our other income is $3 million towards cancellation of vested stock option issued to our former CEO and $2 million towards sale of property. Other income will reduce significantly next quarter as we have repaid part of our debt and won't have onetime items just mentioned.

Interest expense was $24.1 million and includes loan amortization fees of $3 million due to the $235 million paydown of our term loan. Interest expense for next quarter will come down a couple of million dollars from this quarter's level. Tax amount for the quarter was $14.9 million or a 33% rate compared to $15 million in the previous quarter or a 30% rate. This increase in the tax rate is due to India's 2013 union budget that I spoke about last quarter, which included an increase in the corporate tax rate partially offset by a $3.8 million benefit due to merger on our Indian entities. The tax increases begin this quarter, and we anticipate our full year effective tax rate to be 30% to 31%.

For the quarter, GAAP net income was $30 million or $0.28 per diluted share. Our non-GAAP net income, which adds back amortization, stock-based compensation, merger and reorganization costs and ForEx impact on delisting-related assets and liabilities, net of tax, was $34.5 million or $0.44 per diluted share compared to $39.9 million or $0.51 per diluted share in the previous quarter and $21.5 million or $0.28 per diluted share in the second quarter of 2012.

Moving to the balance sheet. As of June 30, 2013, cash and cash equivalents were $390 million, and we paid down around $235 million of debt during this quarter. For the quarter, cash generated from operating activities was $29 million, net of interest payout. CapEx was $8 million. Our DSO stood at 69 days compared to 72 days in the past quarter.

With that, I'll hand the call back to Gerhard.

Gerhard Watzinger

Thank you, Sujit. While we do not provide formal guidance, I will take some time to provide some general commentary about the current environment and our thoughts as we continue through the year. We are pleased with our revenue growth this quarter, and we expect around 2% sequential growth for the next quarter. Demand has improved, and customers' willingness to spend their budgets has returned. We are optimistic that, over time, we can return our revenue growth to industry levels as we start to see the benefits from this improved operating environment and the investments we are making in our marketing, sales, domain expertise and solutions.

Turning to gross margins. As we ramp up our new larger deals, which have lower gross margins in their initial stages, we expect to offset these pressures with gains from the rupee depreciation and operational efficiencies. We expect our gross margins to recover modestly in Q3 and Q4. Assuming current rupee rates and our forward hedging programs, we are expecting a modestly positive impact to margins in the third quarter. However, as Sujit discussed, we will continue investing in sales and marketing, as well as our domain expertise and solutions, particularly in Business Outcomes.

Additionally, legal costs and the CEO search fee will also be expensed in the second half of the year. As a result, you should expect our SG&A expenses to be up modestly, and we believe our EBITDA margins will remain at current levels for the balance of the year.

With that, I will hand over the call to Salil again.

Salil Ravindran

Thank you, Gerhard and Sujit for that excellent overview of the results and financial performance. With that, I'll request Ralph to open the floor for Q&A. Ralph?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Mayank Tandon with Needham & Company.

Mayank Tandon - Needham & Company, LLC, Research Division

Thanks for the transparency around the pipeline and the deals. The first question is around the immigration issue. If you could just provide some commentary around any impact on the business momentum from the immigration bill. It doesn't seem like that was, at least, in this quarter. And then also maybe some feedback from your clients, if you have been talking to them, about what the potential implications of the immigration bill might be.

Gerhard Watzinger

Yes, so this is Gerhard. I'll take this question. So the bill has passed -- was passed by the Senate. Right now, it's in the House of Representatives for approval. And what we already learned from the House of Representatives, they will most likely not approve the bill the way it was passed by the Senate. So the general opinion, so far, is that the final bill will be probably very diluted and will look very different to what it is today. So it is a little difficult to assess the situation at this point of view. But we believe that we, as iGATE, have actually limited exposure with regards to the salary positions. But we're still assessing the impact. One thing that's in our advantage is our benefit that we are pushing the outcome-based model, the iTOPS model, and that model is not really linked directly to people. So this is definitely in our favor. We also already began recruiting more permanent residents for the on-site delivery portion of our business, which will further reduce -- significantly reduce our exposure to the immigration bill. But net effect is we don't know exactly. Nobody knows exactly when and how this bill will go through the House of Representatives, but we keep trying to assess the situation based on the information that we are getting from them.

Mayank Tandon - Needham & Company, LLC, Research Division

Great. And then the second question is around the big deals you signed, that was pretty impressive. I just wanted to understand, is that MetLife deal incremental? In other words, is this upsize what you already were doing with MetLife or is this basically an extension of the legacy contract with them?

Gerhard Watzinger

That is a combination of both. There is a part of the contract, about 2/3 of the contract, where that is -- which is an extension of existing business that we have with MetLife. The extension goes to about 5 years, so that's a commitment that MetLife gave us for the next 5 years, which, I believe, is a great testimony. All this happened in June, that's important to mention. And about 1/3 of the deal was a competitive bid, where we competed against other offshore vendors, and we won this competitive bid. And that would be incremental business.

Mayank Tandon - Needham & Company, LLC, Research Division

And then finally, I would have expected to see a little bit more of a revenue uptick in the upcoming quarters, given that you had these big deals signed up. Is that just because it takes time to ramp them? Or is there anything else that might be impacting the third quarter? I think you indicated that would be up about 2% sequentially versus the 3% uptick that we saw in the June quarter.

Gerhard Watzinger

Yes. With regards to the large deals, both -- or all 3 large deals with -- MetLife is obviously a part of this continuation. We are beginning to ramp up these projects. These are pretty substantial-sized projects, and they require, obviously, a lot of cooperation of the customer and sometimes, the customer determines the speed of the ramp-up. So it's a little bit more difficult to predict exactly what the impact will be. We take a conservative approach. We are on schedule with all these projects right now, but we still have 2.5 months to go in this quarter, so we will see how this will end up. But it's, basically, the ramp-up speed of the large engagements that we have closed will determine also the growth of our third quarter.

Operator

Our next question is from the line of Ed Caso with Wells Fargo.

Richard Eskelsen - Wells Fargo Securities, LLC, Research Division

It's actually Rick Eskelsen on for Ed. I just wanted to follow up on the initial question on the immigration issue. Have clients -- have you seen any deals in the market -- maybe not deals that you've won, obviously, but any deals in the market get delayed or rethought by clients because of uncertainty related to what could happen later in the year from a potential bill?

Gerhard Watzinger

Yes, since -- it's me again, Gerhard. Since this approval process in the House of Representatives is still quite a while away, this may take actually a few years until it's passed. We -- and the unknown of how it will be diluted, changed or even thrown out of the House of Representatives, which is also a chance that this may happen, we have not experienced any impact on any of the customers that we have been in touch with or anything that we would have heard in the market that any customers would have delayed projects because of that situation right now.

Richard Eskelsen - Wells Fargo Securities, LLC, Research Division

It's good to hear. The other one is around pricing. Wondering -- last quarter, you said it's been largely stable. I'm wondering if that's still the case. Or are you seeing any irrationality move into the market?

Gerhard Watzinger

Not really. What we see is obviously a great interest in the business outcome model that we are offering. We're pretty unique in this market. And with the business outcome model, it's the benefit for the customer and obviously, the benefit for the provider, us, as well, to improve the margins. This is still a relatively new model. The large deal, the $200 million deal, 7-year deal, is predominantly in that category, so we will get those benefits at a later stage in the project. But in the general business and our mainstream business, we pretty much saw flat developments over the last 2 quarters.

Richard Eskelsen - Wells Fargo Securities, LLC, Research Division

Okay. And then just the last one, maybe this one is for Sujit. Just help -- could you help us put a little bit finer point on the net interest expense and other income expectations, maybe a run rate that we should use now with the refinancing for the net interest expense?

Sujit Sircar

Sure. This quarter, our other income was $17 million. It included $3 million because of cancellation of vested stock option and $2.3 million on the sale of a piece of land in India. Plus, there was $1 million of gains which we got from other liabilities no longer required. So overall, it's -- so it was around $12 million of 2 other income, the funds and treasury incomes which we had. Out of that, since we have paid off close to $240 million, we expect around -- from next quarter onwards, a run rate of around $5 million to $6 million of true treasury income coming in. In terms of interest expenses, we had $3 million of -- since we paid off the loan much well in advance, so we had to pay the amortization cost write-off of $3 million. Going forward, our interest expense is going to be anywhere -- range between $20 million to $21 million.

Operator

Our next question is from the line of Jason Kupferberg with Jefferies.

Amit Singh - Jefferies & Company, Inc., Research Division

This is Amit Singh for Jason. I just wanted to delve a little bit more into the demand environment that you're seeing in North America. How has it -- has it changed significantly over the last few months and especially if you compare it to the same time sort of last year? And then just to add on to that, with the new sales team and the sales head in North America and these new deals that you mentioned, are you now starting to see an acceleration in bookings in this region?

Gerhard Watzinger

Okay. So first part of the question is market related, the second one is company related. With the first part of the question, we see in the Americas, in the Americas region much more willingness that budgets that have been allocated in the beginning of the year or at the end of the year for 2013 are actually being spent now. This was -- this is definitely different to the previous quarters where budgets were allocated but they didn't actually spend the budgets. So there's a willingness to spend budgets again, and those spends, we had noticed, is not necessarily for cost optimization. It's actually more towards revenue augmentation and business-generating programs. So this is a change that we observed in North America, while, in Europe, it is still predominantly a cost-optimization game. In the U.S., as well as in EMEA, we see great interest in our business outcome offerings. So our pipeline in business outcome offerings has grown very substantially as a part of the overall pipeline. And in particular, in the insurance business, the insurance and the financial services industries is where we see those growth of pipeline. With regards to your second question, which is more with regards to the company, we have increased the number of -- our sales organization pretty substantially. We have made adjustments. We have made adjustments to the process, so not just the volume of people, also to the process. And typically, for new salespeople, it takes about 6 to 12 months until they are really fully up to speed and you can expect full quarter results from salespeople. If you have a salesperson that does a lateral move, say, from 1 vertical to another vertical, it's typically more like 6 months -- 3 to 6 months until they're up to speed. So the main impact of those changes in the sales organization, we expect to see that in 2014

Amit Singh - Jefferies & Company, Inc., Research Division

Okay, perfect. And just going back on the immigration reform bill, and I just wanted to see what are your clients thinking about the bill. Like, as you speak with the clients, are they hesitant? Do you see them being hesitant in awarding new contracts? Or are they of the view that the vendor is -- this is more of a vendor issue and they'll take care of it and nothing from the client side has changed regarding the decision cycle or the amount that they contract?

Gerhard Watzinger

Yes, it's more of the latter one. I'm 8 weeks, as you know, onboard now, so I have spoken to a great number of customers via phone. I've visited a great number of customers. So if I give you my macro view of what I experienced, I cannot remember one single customer that brought it up as an issue, to be honest. I assume that customers really believe the vendor will take care of that and don't really base their decisions on any changes on the immigration side. So my personal experience was it didn't come up in any of the meetings or any of the calls that I had with the customers.

Amit Singh - Jefferies & Company, Inc., Research Division

Okay, great. And just one last, actually for Sujit. Sujit, could you just detail the FX benefit that you got this quarter on your margins and EPS?

Sujit Sircar

Sure. So we had -- this quarter, we had a INR 2 gain, INR 56.50 our realized rate this quarter. And as you know, each rupee will be giving a 25 to 30 basis points gain in our margins. So we had, had a 0.6 -- 60-basis-point increase in our margin because of the ForEx.

Operator

Our next question is from the line of Joe Foresi with Janney Montgomery Scott.

Jeffrey Rossetti - Janney Montgomery Scott LLC, Research Division

This is Jeff Rossetti on for Joe. Just a question on your -- on update possibly on the pipeline now that you've announced these 3 large deals. I just wanted to see if there's anything that you are awaiting that you would like to discuss.

Gerhard Watzinger

Yes, that's a good question. Our pipeline in the previous quarter was about $3.5 billion, and the pipeline this quarter is about $3.5 billion. But when you look into the pipeline, you need to understand that we booked about $600 million of business from this pipeline. And during the last quarter, we have backfilled actually a little more than $600 million of new opportunities that reached that pipeline status. So the pipeline, in spite of the fact that we realized a lot of the deals from the pipeline, was very nicely backfilled in the same quarter. So we keep about the same level of pipeline this quarter as it was last quarter.

Jeffrey Rossetti - Janney Montgomery Scott LLC, Research Division

Okay, great. And then is there any change -- just to go back to the pricing question, was there any change in the business outcome terms that you're discussing with clients that is maybe allowing you to compete more competitively? Because it seems like the environment may be getting tougher out there.

Gerhard Watzinger

Yes. So the -- on the rates, as I said, the rates were pretty flat. If we can see a pressure, it's more like in the commoditized areas, but that's not really iGATE's concentration and focus. But that's where you would see a little bit more pressure. We see stability overall with the rates. But where we believe that we can increase the average rates, because the business model is a little different, is simply offering business outcome-type contracts and delivery models. And as I mentioned earlier on the call, if we break down the pipeline internally, that's an internal measurement, the number of those type of deals as a percentage of the overall pipeline has actually come up pretty substantially. Now this is not something that changes overnight because if you have business outcome deals, these are typically large in size, long in duration and they go through 1 or 2 phases -- 2 or 3 phases to begin with. So you typically take over legacy, then you typically do changes to a legacy and then you go into this benefit model. So to gain those benefits, this takes a while. But this is a part of the business model because these are all long-term commitments from our customers with large contracts. So the benefits of, say, increased average bill rates, if we do this calculation even on an outcome-based model, you would see that more in the second phase of those engagements.

Jeffrey Rossetti - Janney Montgomery Scott LLC, Research Division

Okay. And just the last question for Sujit. I think -- sorry if I missed it, but could you say what the wage increases were and maybe what the margin impact was for the quarter?

Sujit Sircar

Okay. So wage increase was around 10% offshore, around 2% to 3% in on-site from 1st of April. And it had an impact of almost 2.5% in the margin.

Operator

Our next question is from the line of Brian Kinstlinger of Sidoti & Company.

Brian Kinstlinger - Sidoti & Company, LLC

I just want to make sure I understood the ends around looking forward at the other income. What I got was about $9 million to $10 million per quarter total, $20 million to $21 million of interest expense and about $10 million of other income. Is that right? Or am I missing something?

Sujit Sircar

Yes. So total other income, if you look at $17 million other income, $2 million of foreign exchange gains and $21 million of interest expenses.

Brian Kinstlinger - Sidoti & Company, LLC

$2 million -- right. Right, okay. So $10 million a quarter going forward is about right in total other -- in total below the line expenses?

Sujit Sircar

Okay, below the line, okay. So $20 million will be based in -- $20 million to $21 million in interest expense and around $5 million to $6 million on other income. And obviously, foreign exchange, I really don't know what will happen, depending on the ForEx, the movement.

Brian Kinstlinger - Sidoti & Company, LLC

Got it, okay. The $200 million iTOPS deal, has that contract begun already? Did that begin in the second quarter? Is it beginning in the third quarter? Can you just give us an update of timing or when that one will start?

Gerhard Watzinger

Yes, the $200 million deal has begun this quarter. In fact, it has begun, I think, something like 6, 7 days ago. So the impact -- the positive impact of this deal can be seen in Q3, not in Q2.

Brian Kinstlinger - Sidoti & Company, LLC

And what kind of hiring does the company need to do in order to meet this, as well as the European IT deal that you signed? Do you need to get pretty aggressive for the next quarter? Is that not necessary? Maybe take us through that, please.

Gerhard Watzinger

Yes, we will approach this from 2 angles. One is to increase our utilization rate of the existing staff. We have identified existing consultants that can work on those projects. But we will definitely also have to ramp up, over the next 2 quarters, our staff to fulfill the delivery requirements on these projects.

Brian Kinstlinger - Sidoti & Company, LLC

Great. And then if we think about what's going on in Canada, the immigration issues, while I realize your largest customer there will remain a solid customer, I'm sure, for you. Can you talk about is that going to limit your chances of growing that customer -- or growing business there? Maybe just take us through how immigration is impacting even Canada, please.

Gerhard Watzinger

So first of all, once this immigration issue came up in Canada, we have volunteered for audit by the authorities in Canada. This audit was completed, and we came out 100% clean, so there's absolutely no violation, nothing. It was 100% clean bill from the audit, which was also well recognized by the customer. Secondly, we have a very longstanding, very stable relationship with this customer, where we serve all different kinds of business units within the customer, so we don't really see a big impact of that on an ongoing basis. But you never know what a government is going to do, so this is the only unknown component. But from -- based on the all information that we have today and the strong client relationship that we have today, we do not anticipate an impact.

Brian Kinstlinger - Sidoti & Company, LLC

Okay. And then 2 final questions. The first is you mentioned that customers have the opportunity to call and understand the changes going at the top with the removal of Phaneesh. Can you talk about if any customers have pulled back or removed themselves from the process of -- when they might have been thinking about working with iGATE, now maybe they're not?

Gerhard Watzinger

So as you know, I came in about 8 weeks ago. And as you can imagine, that was my first priority, to reach out to -- I really don't know the number of customers, but it was a big number of customers that I visited personally and that I called to make sure that the customers are okay and to get a first-hand feedback from the customers. So number one is all customers, without any exceptions, have supported our decisions. Just to give you a statement of one customer, where I began to explain the situation, the customer responded by, "You're wasting your time. You did the right thing. You basically had no choice. Let's talk about business." That was literally the statement in the first 2 minutes with a customer, and we moved on and we talked about business. So from my interaction, the interaction of all our GO heads, the vertical heads, the delivery organization, we have reached out to, I think, almost all our customers, so 300-plus customers, we have not seen any customer out there that stopped engagements or discontinued engagements with us. In fact, when you look at the large deals that we closed, all these deals were closed post this event, which is a testimony -- especially in the MetLife case that actually extended the commitment to us, which is a testimony that the companies continue. And it's really -- it's not a one-person show, and it will not be a one-person show in the future. It's a strong organizational backbone within iGATE that helps us to go through periods like that.

Brian Kinstlinger - Sidoti & Company, LLC

Great. And the last question, Sujit, on the debt that you paid down, what was the interest rate on that?

Sujit Sircar

3.2%.

Brian Kinstlinger - Sidoti & Company, LLC

And was that used with -- did you bring cash over from India? I mean what cash was used to pay that down?

Sujit Sircar

We generated -- we had started to -- as we said, we are generating cash in various geographies, including United States. So yes, from internal accrual, we have done it. It's nothing -- it's an internal accrual.

Brian Kinstlinger - Sidoti & Company, LLC

And so if I can just ask one last question. Of your general cash flow in the year, how much will be generated in the United States, half, 1/4, a little bit more?

Sujit Sircar

Around half.

Operator

Our next question comes from the line of Glenn Greene of Oppenheimer.

Glenn Greene - Oppenheimer & Co. Inc., Research Division

First -- a couple of questions. The first one, I guess, I just want to go back to the other large deal that was outstanding, which, I think, in the last call, you sort of suggested or described as postponed. Is there any change in the status there? Or is that sort of just we should think about that as off the table for the time being?

Gerhard Watzinger

I'm not sure. Since I was not there, I don't actually know what other large deal. The large deals that were in the pipeline, and I know that the $200 million deal, which, hopefully, in a quarter or so, we might be able to talk more openly about it. We are talking to the customer right now to portray this deal in public as well. That one is obviously closed. That's the one that was mentioned a couple of times. The other large deals that were pending over the last -- or that we were working on over the last 2 quarters were the ones that materialized. So I wouldn't know which other -- Sujit, maybe you can ...

Sujit Sircar

Yes. So there were 2 large deals which we are talking about previous -- last quarter. Both were in the size -- range of $200 million. And in the last conference call, we mentioned that because of a customer -- customer's own internal issues, they have stalled the project at this point of time, and there was no deal in that. So we mentioned in our last call itself, and so there was only 1 deal which was left out. That's what we have guarded now.

Glenn Greene - Oppenheimer & Co. Inc., Research Division

Okay. So no change in the status of that other large deal that was potentially out there. That's kind of have been stalled for internal reasons on their part, it sounds like. Gerhard, you've been here -- you've been there, as you suggested, 8 weeks. And sometimes you kind of come in and you find surprises, and that could be either positive or negative. But I guess just sort of looking for your observations and maybe the board's observations, given sort of, at least, the interim sort of CEO transition over the last 2 months, any sort of surprises?

Gerhard Watzinger

So the last time I was here was 10 years ago, and I came back after 10 years. So there was a gap of 10 years, obviously. The first surprise was there is a number of customers that I reached out that I knew from the time when I was here, including large customers, such as GE. That is a large customer for us, yes. They basically said, "No, we know you already. There's no reason we need a long phone call." So that was a surprise that a lot of the larger customers during my time are still our large customers and shows some client continuation. Even the same people are in charge of it. That was number one. Number two is I met a lot of the key managers, I think pretty much all of the key managers in our organization. It's a group of about 100, 150 people or so, in the first 2, 3 weeks since I joined. The positive surprise there was that I actually knew a lot of them. I mean, obviously, I didn't know the ones that came in through Patni. But from the iGATE side, you just have a longevity of people that are 15, 20, 25 years with the company. And it was pretty amazing that I saw a lot of familiar faces, which you do not necessarily expect when you come back after 10 years, so that was positive. And the third one is the organization has a pretty robust process system in place with the management. So it's really not dependent on the operational side from the previous CEO or myself now or the future CEOs because the organization itself is built in a way that it has strong vertical leaders, strong industry leaders, strong functional leaders in place. And as I mentioned, many of them are with the company for long time. Even on the Patni side, the same thing on the Patni side. Those that came in, it is not unusual that you are in a meeting and everybody is with the company for 15 or 20 years. So that was really a positive surprise to me when I saw that when I came back into the company.

Glenn Greene - Oppenheimer & Co. Inc., Research Division

All right. And then I'll just close with one more thing. You kind of alluded to -- towards getting back to industry growth levels at some point. Given your pipeline, you're starting to win some bigger deals, when do you think it might be realistic to get back to sort of industry growth levels, which I would kind of characterize as at least low-teens?

Gerhard Watzinger

As you know, we are not giving a formal guidance yet with the financials. But if you look into what we have done on the business side, we have ramped up and changed the sales organization over the last 2 quarters, as I said, not just the volume of salespeople, also the processes, how we identify accounts and how we go through that. We have added a new business model, the outcome-based model, which we get a lot of traction out there. I mean you get a lot of interest because it's a clear differentiator from us to the others. It has resulted, this quarter, in great deals. We are very bullish with the pipeline that we created. I mentioned we have $3.5 billion before and we backfilled pretty much $600 million in the quarter in the pipeline, so we're again at $3.5 billion. The sales reps that come onboard will most likely, we will -- the benefits in Q1 maybe a little bit in Q4, but in Q1, Q2 next year, when they are fully up to speed, they build their own pipeline, et cetera. So all these things that we did on the business side will help us to get more to industry rates. But again, we don't do a formal guidance so I can't really forecast exactly when this will happen. But everything is lined up in the right direction.

Operator

Our next question is from the line of Pinku Pappan with Nomura Securities.

Pinku Pappan - Nomura Securities Co. Ltd., Research Division

Just to go back on the large deal wins, did you get any upfront [ph] revenue from the $100 million deal that you signed with a leading telecom provider in Europe? Was there any element of that deal in this quarter? Or when do you expect the revenues to kick in?

Gerhard Watzinger

This is starting all in Q3.

Pinku Pappan - Nomura Securities Co. Ltd., Research Division

3Q, okay. And what are the tenure of these contracts? I mean, of all the deals that you've won, are they largely 5-year contracts? Or...

Gerhard Watzinger

Yes, this is 2 5-year contracts, 1 7-year contract.

Pinku Pappan - Nomura Securities Co. Ltd., Research Division

Which is the 7, may I know?

Gerhard Watzinger

7-year contract is the $200 million iTOPS deal.

Pinku Pappan - Nomura Securities Co. Ltd., Research Division

Okay. And could you also share the outlook in Europe? What's happening there? And when do you expect Europe growth to come back?

Gerhard Watzinger

So in Europe, and this is why quarterly views often do not reflect the true state of the business, and you see a flat growth in Europe. But Europe is where we closed 2 of these large deals, and we have a few other large deals in the pipeline in Europe, which will significantly alter the growth trajectory in Europe over the next quarters. So I'm actually pretty bullish in EMEA, in Europe, especially because we have those deals already in the back and new deals will hopefully come very, very soon, maybe even in Q3. So Europe will be a great contributor to the growth over the next quarters.

Pinku Pappan - Nomura Securities Co. Ltd., Research Division

Okay. And a question for Sujit. What portion of the cash is right now in India?

Sujit Sircar

We have around -- out of $390 million, we have around $150 million.

Pinku Pappan - Nomura Securities Co. Ltd., Research Division

Okay. And similarly, for the loan book, for the total loans, what portion of that is in rupee loans?

Sujit Sircar

There is no rupee loan.

Operator

Our next question comes from Ashwin Mehta of Nomura.

Ashwin Mehta - Nomura Securities Co. Ltd., Research Division

Just an add-on to what Pinku asked. How much time do you envisage these deals will take to reach steady state in terms of quarters? Will it be 2- to 3-quarter duration that these deals take to reach steady-stage revenues?

Gerhard Watzinger

So if you take this -- each deal is different. So if you take the MetLife deal, 2/3 of that deal is an extension of existing work and about 1/3 is additional work. That 1/3 will be ramped up over the rest of the year basically, so a steady stage is most likely -- will be reached by the first quarter. The second deal, the telecom deal in Europe, that ramp-up takes probably 2, 3 quarters until we are steady stage. It's probably more like 3 quarters that we are there. It's a 5-year deal, and we expect to be in a fully ramped-up stage more likely by Q2 2014. And the $200 million iTOPS deal goes through 3 phases: first is the handover of the legacy environment, then it's the transformation to a new platform and then we move into the outcome-based model. So this ramp-up is really by phases. The first phase of taking over the legacy, that's about a little less than a year. Then transforming to a new platform will take around about 1 year to 18 months. And then going into an out-based model, which is really the final and steady stage then, is in about 2.5 years from now.

Ashwin Mehta - Nomura Securities Co. Ltd., Research Division

Okay. And just one more thing for Sujit. In terms of margins, when do we see our 40%, 25% targets on gross margins and EBITDA margins getting touched? Would that be more towards the second half of next year, given that you'll have ramp-ups on these deals over the next 2 to 3 quarters?

Sujit Sircar

Already we are at 23.4% EBITDA margin and 38% gross margin, and we said there might be a modest increase potentially, given all those expenses and all those ramp-up of deals. We are still confident. We think we have levers enough to take that on, and we think by first quarter -- first half -- I'm sorry, second half of 2014, we'll achieve that.

Operator

Our next question comes from the line of Vincent Colicchio with Noble.

Vincent A. Colicchio - Noble Financial Group, Inc., Research Division

Do you have any large contracts coming up for renewal in the next couple of quarters?

Gerhard Watzinger

Yes, we do. With our -- I mean, in fact, 1 larger contract was renewed in Q2, which we didn't mention, but it was a relatively large contract renewal. It was just renewal of existing business, and every quarter, we have a couple of them. There's not one outlier in it this quarter. But there's a few of our larger customers where we do renewals, and we don't see any reason why they wouldn't happen.

Vincent A. Colicchio - Noble Financial Group, Inc., Research Division

Okay. And in terms of competitors getting more involved on the outcomes-based side, are you seeing any of that? Any movement there?

Gerhard Watzinger

No. I mean, we have really 2 differentiators in the market which is pretty unique, and we haven't really experienced competition in that particular area. One is that we are building solutions, and solutions is very unique to our type of business. And we have our own solution development group, and we go with these solutions to the customers, such as the reference data system. And the second one is the outcome-based structure, the outcome-based models that no other competitor has. So from that point of view, we don't really see a lot of competition.

Vincent A. Colicchio - Noble Financial Group, Inc., Research Division

And Sujit, what interest rate are you getting on your cash in India?

Sujit Sircar

Sorry, I didn't hear your question.

Vincent A. Colicchio - Noble Financial Group, Inc., Research Division

What interest rate are you getting in India on your cash?

Sujit Sircar

10%.

Operator

Our next question is from the line of Eric Cole [ph] of Cole Capital [ph].

Unknown Analyst

Question number one, regarding the immigration questions, can you clarify how many U.S. employees iGATE has? And of those U.S. employees, how many are in the United States with H-1B visas?

Gerhard Watzinger

Sujit?

Sujit Sircar

We have around 4,000-plus employees in the United States. We don't give numbers on how much is H-1B on the 4,500 employees there.

Unknown Analyst

I'm fairly sure you might have seen the analysis another analyst has done on Wall Street regarding the immigration theoretical impact on Cognizant. I'm just wondering, without giving specific numbers, is it fair to say that your mix of employees in the U.S. with H-1B visas is a much lower percentage mix than a Cognizant would have.

Sujit Sircar

As of now, whatever analysis you do, it's -- there's so much change, so much fluidity in that whole stuff, it takes a while. From our perspective, whatever Gerhard said in the previous one, I don't expect a significant impact. There is going to be impact. In its current state, there is going to be an impact, but considering our salary levels, where we are, there is not going to be a significant impact. But yes, with respect to the 15%, 75% rule, where the extra visa cost is there, that will have some impact of it. But yes, we are still evaluating that at this point of time.

Gerhard Watzinger

And I want to add to this, since it will take a while until this bill will be approved, if it is going to be approved by the House of Representatives and to what stage, this is expected to take quite a while. We are talking about years here, 1 or 2 years at least. While we are moving a good percentage of our business, and that's our stated goal, into an iTOPS, into an outcome-based model, which is then not linked directly to employees, that will further reduce our exposure to this entire immigration thing. So by the time we ramp up our business on the outcome side, Business Outcomes side, and the potential bill, in whatever shape or form comes through, we might have actually reduced the risk pretty substantially.

Unknown Analyst

Okay. And then one follow-up. I believe about 50%, half of all the expenses at iGATE are denominated in Indian rupees. If the current exchange rate, theoretically, continued going forward, with your current hedges in place, what sort of additional benefit would you get or FX gains for the next 6 months of 2013? And then in 2014, I guess, when your hedges are not in place, how much larger would the benefit be?

Sujit Sircar

Anyway, it's a very theoretical question, but still, I'll attempt an answer. We currently do around anything between 40% to 60% of our inflows are hedged. That's point number one. Point number two is that each percentage -- I'm sorry, each rupee depreciation will have a 25 to 30 basis points in terms of the margin expansion, so we had a INR 56.50 as an exchange rate for the current quarter. So currently rupees are at INR 60, so you have that kind of an impact in your margin. In terms of your operating margin, correspondingly, since you have hedged, you will have exchange loss on 40% -- or 40% to 60% of your inflow. So effectively, your EPS will show a little increase because you're not fully hedged 40% to 50%, 60% hedged. But the operating margin should go up effectively, the EBITDA margin should be able to go up by, again, I said INR 1, 25 to 30 basis points.

Unknown Analyst

Okay. And lastly, on your SG&A, maybe I did not hear clearly comments earlier. It was $49 million in the quarter, do you see your SG&A per quarter moving to a lower level the rest of the year as some nonrecurring expenses are not in there?

Sujit Sircar

Yes, because $49 million had a $4.6 million of accrual on our stamp duty and property transfer charges which the Indian merger had. So that, obviously, we'll not incur every quarter, and yes, so that's why that will come down. But on an ongoing basis, there'll be a modest increase because of new sales and solutions, which we are investing currently. But effectively, we concentrate mainly on the margin, and we think, our margin, EBITDA margin, of 23.4% currently in this quarter, continues to be in the similar range or maybe a little bit uptick from there.

Operator

Ladies and gentlemen, at this time, we have reached the end of our allotted question-and-answer session for today. I will now turn the floor back over to Mr. Ravindran for closing comments.

Salil Ravindran

Okay, thanks, Ralph. Thank you, everybody, for joining the call. With that, we'll conclude the call. See you all next time. Thank you. Have a great day.

Operator

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

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